June 23, 2009

2008 Audit Report for Michaywe Owners Association

2009 June 23
Last edit: 2010 Feb 17. Click History for a list of changes and updates.

__The continuation of this post is my email to Mr. David Myler of the CPA firm conducting the 2008 audit concerning the report made by a staff member of this firm at the 2008 MOA Annual Meeting. The email supports and explains my comments and questions at the Annual Meeting.

__I did recommend this firm because it focuses on reviews and audits for owners associations and has the knowledge of the accounting standards applicable to owners associations.

__The results have been disappointing. The content and format for the audit reports have changed each year. Many of the requirements in the applicable audit and accounting guide for owners associations do not appear to have been applied.

__ The lack of consolidated financial statements, however, is the responsibility of the MOA Board which did not authorize their preparation even though required as part of GAAP.

Don Nordeen
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  • Key Words:_ • Accounting Practices, MOA; • Financial Information, 2008 General; • MOA Operations, General/Total; • Reserves for Capital Repair; accounting principles; AICPA Audit & Accounting Guide for Common Interest Reality Associations; AICPA Audit & Accounting Guide; audit; CIRA; Common Interest Realty Association; consolidated financial statement; preservation fund; transparency
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2008 Audit Report for Michaywe Owners Association (continued)

___ From: Don Nordeen
____ Date: 2009 June 23 17:32:58 EST
_____ To: Dave Myler
_____ Cc: MOA Board of Directors (Brenda Durant, Carolyn Study, Jay Welter,
________ Rich Gaubatz, Tad Latuszek, Vicky Rigney, Mike Buckley), Todd Chwatun
__ Subject: 2008 Audit Report for Michaywe Owners Association

2009 June 23

Mr. Dave Myler
Myler & Szczypka, P.C.
Ann Arbor, MI 48104

Dear Dave:

Re: 2008 Audit Report for Michaywe Owners Association

__ After the Annual Meeting on 2009 Jun 20, I re-read the audit chapter in the AICPA A&A Guide for CIRAs (2004 version). It appears to include many specific requirements that were not reflected in the draft audit report discussed at the Annual Meeting. My comments on the 2007 Audit Reports in my 2009 May 18 email to you did not appear to be addressed in the 2008 audit report presentation at the Annual Meeting.

__ I know it is difficult to conduct an audit of MOA and PCC for many reasons. While the policy is to conform to GAAP for internal accounting, the actual accounting has many areas of non-conformance to GAAP. One of the results is that too many related-party and adjusting transactions are required. Moreover, no corrective action is taken. With PCC as a wholly-owned subsidiary of MOA, consolidated financial statements are required. One of the results is that too many related-party and adjusting transactions are required. Yet the board apparently refuses to authorize consolidated statements. Most of the concerns described below have their roots in the non-conforming accounting used by MOA and PCC.

__ Sections and paragraphs in the CIRA Guide from Chapter 7, Audits, relevant to my concerns are:
  1. Section "A CIRA's Documents" (§§7.04-7.06) — Need to review and use the provisions in the CIRA's governing documents in the preparation of the audit reports.
  2. Section "Minutes (§7.07) — "Auditors should review minutes and consider matters that may affect the CIRA's financial statements."
  3. Section "Consideration of Fraud in a Financial Statement Audit" (§§7.20-7.22) — Specifically "Misstatements arising from fraudulent financial reporting." Misstatements are bound to occur when the internal accounting does not conform to GAAP.
  4. Section "The Importance of Exercising Professional Skepticism" (§§7.23-7.25) — Given the non-conformances, a high degree of skepticism is required.
  5. Section "A Presumption That Improper Revenue Recognition Is a Fraud Risk" (§7.31) — This principally involves the booking of all dues billed as income when experience is to the contrary. This is avoided by use of the revenue recognition and matching balancing principles for dues recognition as described in my 2009 May 18 email to you. Further, this also provides the important information of amount of dues and assessments written off as truly uncollectible.
  6. Section "Evaluating Audit Evidence" (§7.37-7.38) — This is a critical issue with regard to Future Major Repairs and Replacements. Conformation that the accounting agrees with the evidence is necessary for credibility.
  7. Section "Responding to Misstatements That May Be the Result of Fraud" (§7.39-7.41) — MOA's internal accounting is not consistent with the provisions in the governing documents with regard to Future Major Repairs and Replacements.
  8. Section "Budgets" (§§7.46-7.48) — §7.46 states
    "7.46 The operations of most CIRAs are based on budgets, which are used as bases for assessments from unit owners. The auditor should consider the CIRA's budgeting procedures in obtaining an understanding of internal control and assessing control risk. SAS No. 56, Analytical Procedures, provides guidance on the use of analytical procedures and requires the use of analytical procedures in the planning and overall review stages of all audits. The auditor should consider comparing budgeted amounts with actual amounts as an analytical procedure in the audit of a CIRA."
  9. MOA has consistently been overly optimistic in budgets with actual bottom line results unfavorable to budget by $200,000 or more. The bylaws require a balanced budget. This is a systemic problem in MOA and should be included in the audit report.
  10. Section "Assessments Receivable" (§7.50) — The assessments receivable do not appear in the Statement of Financial Position for MOA. This is also a result of not using the balancing matching principle in revenue recognition.
  11. Section "Investments" (§7.51)
  12. Section "Future Major Repairs and Replacements" (§§7.54-7.58) — Among other provisions, these paragraphs describe "set aside" of funds which members can understand and should be advised in the audit report whether or not the prescribed funds have been "set aside". I believe the accounting meaning of "set aside" is restricted assets which cannot be commingled with operating funds. The 2005 audit report used the term "temporarily restricted assets" or equivalent.
  13. Section "Auditor's Report" (§§7.64-7.67) — §7.64 states:
    "7.64 Under certain circumstances, such as when the disclosure about funding for future major repairs and replacements required in paragraph 4.26 of this guide is inadequate, the auditor should consider whether to modify his or her report because of a departure from GAAP."
  14. Section "Reporting on Required Supplementary Information" (§§7.68-7.75) — §7.71 states:
    "7.71 The following illustrates an explanatory paragraph that an auditor might use in circumstances in which the supplementary information materially departs from information required by paragraph 4.33 of this guide:
    The supplementary information on future major repairs and replacements on page XX is not a required part of the basic financial statements, and we did not audit and do not express an opinion on such information. However, we have applied certain limited procedures, which consisted principally of inquiries of management regarding the methods of measurement and presentation of the supplementary information. As a result of such limited procedures, we believe that the supplementary information on future major repairs and replacements is not in conformity with guidelines established by the American Institute of Certified Public Accountants [describe the material departures]."

__ __ Future Major Repairs and Replacements — This is the most serious concern in my view. As described in by 2009 May 18 email, the governing documents require that a sufficient amount be set aside to maintain the assets. MOA's reserve study, albeit not conducted by a professional, indicates that $161,000 annually is required. Prior to the $161,000 figure, my recollection is that the number was $80,000 annually. MOA has not been basis for defining the sufficient amount and therefore the $161,000 annual amount should be used to define the amount for future major repairs and replacement. However, MOA has a policy of only setting aside $48,000 annually (a patent non-conformance), but only set aside $36,000 in 2008. Based on the $161,000 and $48,000 numbers, the annual shortfall in the funds set aside is $113,000. All of these descriptions should appear in MOA books, but they don't. Moreover, in some kind of confusion in 2007, about $80,000 of the funds that should be set aside were commingled with MOA's operating fund, and never explained.

__ I believe the A&A Guide requires the CPA to verify all of the above numbers and requirements. Those numbers and documents should provide all the facts needed to factually describe the status of the funding for Future Major Repairs and Replacements including the fund shortfall which is at least $80,000. The 2005 audit report contains such an analysis on page 18. It quotes the requirement in the governing documents and concludes with a statement"
"Based on current estimates provided by the study, current funding of $161,285 per year would be needed to ideally fully fund the projected cost of replacements and repairs. The current study suggests that the reserve fund should be funded to an estimated amount of $806,500 to date and that it is underfunded by approximately $600,000."
However, the 2005 audit report does not show this accounting in the financial statements. The Replacement Fund is now likely underfunded by $900,000. Members need to be advised in the 2008 Audit Report.

__ Operating Profits/Losses — The related-party and closing entries do not have face validity. The total operating loss for MOA and PCC after the closing entries is much greater than before the entries. It seems that entering an operating loss from PCC into MOA's accounting should remove that loss from PCC's accounting. What is the justification for the partial loss from PCC that is entered into MOA's books? Explanation is required. There does not appear to be any note that the income tax credit is of no value since there is no expectation that PCC will ever earn a profit. __

__ Budgets — MOA has consistently missed budgets. It might be better stated that MOA's budgets have not been realistic and achievable. See §§7.46-7.48 CIRA Guide.

__ MOA as a Going Concern — At the Annual Meeting, the answer about MOA as a going concern was speculative and assumed that the dues would be increased. There is no basis for that assumption. The dues cap is controlled by the MOA members and any changes require approval of a majority of those voting. The assessment of MOA as a going concern should be made based on the facts, not assumptions. The facts include the performance to budget, the ongoing operating losses, the lack of changes in operations to address the ongoing operating losses, the large negative working capital, the increasing use of the line of credit for operations, and ignoring the status of the replacement fund.

__ I am available for dialogue and to answer any questions.

Sincerely,

Don Nordeen
(989) 939-8240

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